Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?
One thing’s for sure: You’ll never discover truly great investments unless you actively look for them. Let’s discuss the ideal qualities of a perfect stock, then decide if LinkedIn Corp (NYSE:LNKD) fits the bill.
The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:
Margins. Higher sales mean nothing if a company can’t produce profits from them. Strong margins ensure that company can turn revenue into profit.
Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management’s attention. Companies with strong balance sheets don’t have to worry about the distraction of debt.
Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
Valuation. You can’t afford to pay too much for even the best companies. By using normalized figures, you can see how a stock’s simple earnings multiple fits into a longer-term context.
Dividends. For tangible proof of profits, a check to shareholders every three months can’t be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.
With those factors in mind, let’s take a closer look at LinkedIn.
| Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
| Growth | 5-year annual revenue growth > 15% | 97.3% | Pass |
| 1-year revenue growth > 12% | 86.2% | Pass | |
| Margins | Gross margin > 35% | 87.1% | Pass |
| Net margin > 15% | 2.2% | Fail | |
| Balance sheet | Debt to equity < 50% | 0% | Pass |
| Current ratio > 1.3 | 2.45 | Pass | |
| Opportunities | Return on equity > 15% | 2.8% | Fail |
| Valuation | Normalized P/E < 20 | 556.96 | Fail |
| Dividends | Current yield > 2% | 0% | Fail |
| 5-year dividend growth > 10% | 0% | Fail | |
| Total score | 5 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at LinkedIn last year, the company has kept its five-point score. Growth has continued at a ridiculous pace, but the company is still struggling to try to make a substantial profit. Still, promising progress has helped the stock climb more than 80% over the past year.
Among social-media companies, LinkedIn has been the exception to the general rule. Most companies in the space have been dependent on advertising for their sales from the beginning, leaving them vulnerable to ad gluts and changing economic conditions. Even industry-giant Facebook Inc (NASDAQ:FB) gets nearly 85% of its revenue from ad sales, and Facebook has had trouble adapting that ad model from the mature PC market to work on cutting-edge smartphones and tablets. That’s been a big part of why Facebook Inc (NASDAQ:FB)’s progress has disappointed investors lately, and why LinkedIn Corp (NYSE:LNKD), with only about a quarter of its sales coming from advertising last year, is soaring.
